I wonder why Fed chairman Jay Powell bothers with the post FOMC press conference since messaging to the financial markets is not exactly his forte. Powell messed up again when he implied the Federal Reserve’s “25 basis point rate cut at the July FOMC was a mid-cycle adjustment”. Wall Street interpreted his words as “one and done” – exactly the interest rate shock I wrote about on July 29 since the aggressive four rate cuts implied in Chicago Merc’s money market futures markets made no sense to me. As I expected, this meant a bloodbath in equities, a hit to gold and a spike in the US Dollar Index to 98.80. So the S&P index fell 30 points in its worst single day since May even after Powell hastily added that he would be willing to cut rates in the future if the data warranted. After all, the “data dependent” Fed cannot exactly base policy on data that will only emerge in September and October.
It did not surprise me that the growth/momentum sector of the stock market, led by software/cloud stocks was hit the hardest last night in New York. So Microsoft fell from 142 to 136 – and if Mister Softy/the Evil Empire of Redmond falls to 120 – 124, I promise I will write an update on a business I believed was a table pounding buy last December at 97 – 98.
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The July FOMC has not resolved the deflation big chill that now afflicts Europe, China, Japan and most emerging markets – imagine the absurdity of a Fed rate cut that causes King Dollar to surge even higher. Note the Euro has now broken its last shreds of support and seems headed to my strategic target of 1.08. If Jay Powell had wished to telegraph a more accommodative monetary policy, he failed miserably since the US Treasury note yield curve flattened, a clear signal of tight money.
It also saddened me to see the two regional Fed Presidents I respect most in the FOMC – the Boston Fed’s Eric Rosengren and the Kansas City Fed’s Esther George -dissent in the FOMC’s 8-2 vote to cut rates. Obviously, Rosengren and George concluded the robust US economic data did not warrant even a token, highly telegraphed 25 basis point rate cut. This dissent in the FOMC conclave erodes the credibility of Chairman Powell as the head of US monetary policy.
Jay Powell explained this rate cut was a response to trade uncertainties and the synchronized fall in factory orders in Europe/China. This is not exactly the statutory dual mandate that Congress has given to the Federal Reserve – and thus Chairman Powell is vulnerable to political pressure from a Trump White House outraged at his empirical, gradualist paradigm of monetary policy.
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The message from equities (Dow down 338 points on FOMC night), bonds (higher 1.87% yield on the 2 year US Treasury note, the security most hypersensitive to expectations of Fed policy shifts), foreign exchange (new lows in the poor Euro, a hapless punching bag for short sellers) and gold (down $20 on Wednesday) explain me the macro zeitgeist loud and clear. Wall Street does not believe Jay Powell’s dovish, 'don’t worry, be happy' verbiage to the capital markets. The Federal Reserve will simply not be as enraptured by easy money as the ECB in Frankfurt, the BOE in London, the Bank of Japan in Tokyo and the People’s Bank of China in Beijing. This means more fireworks in the stock market, higher dollar and US short money market rates, an end to another false dawn gold/silver rally.
With the 2 year Treasury note yield at 1.87% and the 10 year Treasury note at a mere 2.03%, the yield curve flashes a tight money/scale back risk signal to me, exactly the opposite of Powell’s intended message. Predictably, President Trump will demonize Jay Powell to his Middle America voter base for not daring to aggressively cut interest rates, thus further eroding the central bank’s political independence. The future, dear Brutus, lies not in the stars but in the flow of US economic data in August and beyond. If July nonfarm payroll is 200,000 or higher on Friday, expect another equity/debt/gold/Euro bloodbath as financial markets price out a September FOMC cut.
The only silver lining from the August spasm of risk aversion I expect is that Bitcoin and its crypto-excreta will get shredded by 20 – 30%, as will Beyond Meat, now valued at 11.8 billion.
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